Signal providers – should I trust them?

signal providers

There is a lot to talk about here but I’d like to keep it as short as possible. One of the biggest disadvantage of signal providers is human emotions, very few traders can handle the pressure and believe me the pressure that comes from unhappy customers is huge and surely can distract anyone from trading and force to do stupid mistakes. Customers are always unhappy no matter what, especially in this business, and they have the right to be. They can’t seem to understand that there is not possible to win all the time. Whether you trade using forex robots or manually, the drawdown will come sooner or later. And when it comes, they will forget about every profit they made, and even if overall they are in profit, the complains will start. Even if they have no clue about manual trading, they start to give “precious” advices and put more pressure on the trader.
No results = no money, customers won’t pay the fees and perhaps some of them will cancel the existing subscription leaving the trader with no motivation to continue.

On the other hand, let’s see things from a customer perspective. There are so many unscrupulous vendors and signal providers in this industry trying to make a quick buck, many customers were scammed at least once one way or the other: legit refunds were refused, curve fitted and crap EAs were advertised as the holy grail just to fail a few months later, etc. Even legit EAs with sound strategies failed or didn’t yet come out of a prolonged drawdown period. Even if that drawdown was to be expected, it’s hard to see your hard earned money slowly vanishing.  The sentence “don’t invest what you can’t afford to lose” made no sense before and makes no sense now. Human being are driven by emotions, reason is just a short term tool which is used time to time where emotions are not present.  We are driven by hopes, expectations and faith, not by reason. Without hope, expectations and faith our lives don’t make sense. That’s why 95% of so called traders lose their money. And 5% of them are winning because they have no emotions, they are psychopaths.

Quotes from forbes:

Today, Alessio Rastani, a stock market and forex trader in Europe, admitted as much to the BBC (full video below), in a brutally honest — and chilling — interview: “I’m a trader. I don’t care about [investors’ happiness and confidence]. If I see an opportunity to make money, I go with that. For most traders, we don’t really care how they’re going to fix the economy. Our job is to make money from it. Personally, I’ve been dreaming of this moment for three years. I have a confession, which is I go to bed every night and I dream of another recession. I dream of another moment like this.”

If you are not like this, then you are in trouble. The only way to get away with some money in your pocket is not to invest what you can’t afford to lose.

Now, back to our signal providers.

PROS

1. No expert advisor can trade as a human can. Fact. No forex robots can properly identify support and resistance points and no forex robot can read and interpret the news.

2. No forex robot can switch between strategies according to market behavior.

3. No forex robot can change money management on the spot to protect the existing profit.

4. No forex robot can adjust stop loss and take profit levels according to market changes. Volatility based stop loss and take profit is a good technique, but is incomplete, only a human can do it properly.

5. A good trader can spot trading opportunities at least once a day.

6. Human traders can have a good profit factor and achieve monthly profits no expert advisor can.

CONS

1. A human trader is subject to emotions

2. A signal seller wants to make money, more money and they make money if the equity reaches new highs. They might try to force the market and lose all your money.

3. In order to impress new subscribers with their profitability, most signal providers apply “hold and pray” strategy which consists in letting a trade flow without stop loss and hoping the market will return to initial level. It may never return.

How to spot genuine signal providers?

1. Positive risk/reward ratio. Take profit is always or most of the time greater than stop loss.

2. All orders must have initial fixed stop loss and take profit. Stop loss should only be moved in the direction of the trend, if the signal provider moves the SL against the trend, run!

3. Signal provider must have a trading history longer than 6 months.

4. He must be able to fully explain his strategy and money management rules.

5. If you see grid and martingale systems, run and don’t look back!

6. Ask him/her how many positions are open at the same time and what is the maximum stop loss for each pair. Make sure you don’t lose more than 1-2% of your account per basket. Risk should always be smaller than reward. Keep that in mind, it could save your account someday!

7. If it’s possible, he/she must keep a daily trading journal, publicly available in which he/she explains the decisions.

If you think these advices can save your account, don’t be selfish and pass the article to your fellow traders 🙂